Real estate appraisal
Real estate appraisal, home appraisal, 'property valuation or land valuation' is the process of assessing the value of real property. The appraisal is conducted by a licensed appraiser. Real estate transactions often require appraisals to ensure fairness, accuracy, and financial security for all parties involved.
Appraisal reports form the basis for mortgage loans, settling estates and divorces, taxation, etc. Sometimes an appraisal report is also used to establish a sale price for a property. Factors like size of the property, condition, age, and location play a key role in the valuation.
Obtaining an appraisal
Appraisals are often required by lenders for issuing or refinancing a loan. In such cases, when the borrower asks the lender for a loan or a refinance, the lender will order an appraisal. Once ordered, the borrower will have to schedule an appointment with the appraiser for the in-home visit.The appraiser will visit the property, assess it, gather data and leave. This usually takes a few hours, depending on the size of the property. After the on-site visit, the appraiser will spend time researching and preparing an appraisal report. The appraiser will provide the completed report to the lender within a couple business days. The borrower may also obtain the report upon request.
On average, the entire process of obtaining an appraisal takes from 5 to 15 days.
Types of value
There are several types and definitions of value sought by a real estate appraisal. Some of the most common are:- Market value – the price at which an asset would trade in a competitive Walrasian auction setting. Market value is usually interchangeable with open market value or fair value. International Valuation Standards define:
- Value-in-use, or use value – the net present value of a cash flow that an asset generates for a specific owner under a specific use. Value-in-use is the value to one particular user, and may be above or below the market value of a property.
- Investment value – the value to one particular investor, and may or may not be higher than the market value of a property. Differences between the investment value of an asset and its market value motivate buyers or sellers to enter the marketplace. International Valuation Standards define:
- Ad valorem tax value – the value used for taxation purposes, determined by the collection of data through the mass appraisal process. The mass appraisal process applies the data collected through various sources to real property to determine taxable value.
- Insurable value – the value of real property covered by an insurance policy. Generally, it does not include the site value.
- Liquidation value – may be analyzed as either a forced liquidation or an orderly liquidation and is a commonly sought standard of value in bankruptcy proceedings. It assumes a seller who is compelled to sell after an exposure period which is less than the market-normal time-frame.
Price vs value
At other times, a buyer may willingly pay a premium price, above the generally accepted market value, if his subjective valuation of the property was higher than the market value. One specific example of this is an owner of a neighboring property who, by combining his property with the subject property, could obtain economies-of-scale and added value. Similar situations sometimes happen in corporate finance. For example, this can occur when a merger or acquisition happens at a price which is higher than the value represented by the price of the underlying stock. The usual explanation for these types of mergers and acquisitions is that "the sum is greater than its parts", since full ownership of a company provides full control of it. This is something that purchasers will sometimes pay a high price for. This situation can happen in real estate purchases too.
But the most common reason for value differing from price is that either the buyer or the seller is uninformed as to what a property's market value is but nevertheless agrees on a contract at a certain price which is either too expensive or too cheap. This is unfortunate for one of the two parties. It is the obligation of a real property appraiser to estimate the true market value of a property and not its market price.
Frequently, properties are assessed at a value below their market values; this is known as fractional assessment. Fractional assessment can result in properties that are assessed at 10% or less of their given market values.
Market value definitions in the United States
In the United States, appraisals are for a certain type of value. The most commonly used definition of value is market value. While Uniform Standards of Professional Appraisal Practice does not define market value, it provides general guidance for how Market Value should be defined:A type of value, stated as an opinion, that presumes the transfer of a property, as of a certain date, under specific conditions set forth in the definition of the term identified by the appraiser as applicable in an appraisal.
Thus, the definition of value used in an appraisal or current market analysis analysis and report is a set of assumptions about the market in which the subject property may transact. It affects the choice of comparable data for use in the analysis. It can also affect the method used to value the property. For example, tree value can contribute up to 27% of property value. CMA reports are sometimes referred to as "pencil appraisals" or automated valuation model reports, but these terms are incorrect even when they are part of real estate "shop talk."
Main approaches to value
There are three traditional groups of methodologies for determining value. These are usually referred to as the "three approaches to value" which are generally independent of each other:- The sales comparison approach.
- The cost approach.
- The income approach.
As mentioned before, an appraiser can generally choose from three approaches to determine value. One or two of these approaches will usually be most applicable, with the other approach or approaches usually being less useful. The appraiser has to think about the "scope of work", the type of value, the property itself, and the quality and quantity of data available for each approach. No overarching statement can be made that one approach or another is always better than one of the other approaches.
The appraiser has to think about the way that most buyers usually buy a given type of property. What appraisal method do most buyers use for the type of property being valued? This generally guides the appraiser's thinking on the best valuation method, in conjunction with the available data. For instance, appraisals of properties that are typically purchased by investors may give greater weight to the income approach. Buyers interested in purchasing single family residential property would rather compare price, in this case, the sales comparison approach would be more applicable. The third and final approach to value is the cost approach to value. The cost approach to value is most useful in determining insurable value, and cost to construct a new structure or building.
For example, single apartment buildings of a given quality tend to sell at a particular price per apartment. In many of those cases, the sales comparison approach may be more applicable. On the other hand, a multiple-building apartment complex would usually be valued by the income approach, as that would follow how most buyers would value it. As another example, single-family houses are most commonly valued with the greatest weighting to the sales comparison approach. However, if a single-family dwelling is in a neighborhood where all or most of the dwellings are rental units, then some variant of the income approach may be more useful. So the choice of valuation method can change depending upon the circumstances, even if the property being valued does not change much.